LNG agreement dangerous move

While natural gas has no smell of its own, there’s occasionally a whiff of rotten eggs at the wellhead. A faint hint of the same aroma accompanies an agreement the province just signed with Pacific Northwest LNG. The $36-billion project envisages a liquefied natural gas complex at the port of Prince Rupert. Natural gas will be piped from the Interior, liquefied at the plant and shipped overseas from a specially constructed terminal.

There are still hurdles to clear. Regulatory bodies must give their approval. And consultations must be held with First Nations in the region.

However, if the project proceeds, it could bring the province $7.7 billion in revenues over the 23-year life of the agreement. So what’s not to like? To finalize the deal, Premier Christy Clark made a concession that no B.C. government has ever granted. She indemnified the company against any increase in taxes or royalties until 2038 — the end of the agreement.

That means if a future government raises royalties, the company would be entitled to compensation in the amount of the increase.

Normally, governments do not bind the hands of their successors. It’s understood that whatever tax rates one administration imposes, another may change.

But this agreement has the effect of a legally binding contract, meaning it would be difficult, if not impossible, to set aside. It’s a measure of how radical this deal is, that special legislation is required to put it in place.

Public authorities do occasionally enter long-term agreements. In 2006, B.C. Hydro signed a 27-year contract with private electricity providers to supply power at preagreed rates.

What’s different about the LNG deal, however, is that it reshapes an entire field of royalties and taxes for one beneficiary. Yet it’s a basic principle of royalty regimes that everyone gets the same treatment.

The definition of an unfair tax is one that’s applied arbitrarily or inconsistently. But isn’t that what government has done here?

More than 30 companies operate well sites in B.C.’s natural gas industry. Do they now get this deal?

What about new arrivals — do they also receive an indemnity?

Then again, the average royalty rate for natural gas producers in B.C. is 8.84 per cent. But the rate guaranteed Pacific Northwest LNG is just 6.06 per cent for the first year, rising thereafter.

The premier could argue that without these concessions, the project would have stopped in its tracks. And that might well be true.

Yet the precedent is both dangerous and unsettling. It conveys the impression that the foundations of our resource pricing are shaky. It makes us look desperate. Certainly, it invites scorched-earth bargaining by whichever company comes along next.

It’s too soon to know, financially speaking, if this is a profitable arrangement for the province. The government of Newfoundland used some of the same arguments when it entered the Churchill Falls agreement with Hydro-Quebec.

That contract (including an automatic renewal clause) froze royalties in place for 71 years. Rising electricity prices have turned the agreement into a disaster for Newfoundland. Something similar could easily be the fate of the LNG project.

At the same time, when U.S. secretary of state William Seward bought Alaska from Russia in 1867, the purchase was ridiculed as Seward’s Folly. The price he negotiated — $7.2 million — was unheard-of in those days.

Yet Seward is now viewed as far-sighted, and Clark might enjoy the same reward.

Nevertheless, whatever the outcome, indemnities are now a precedent that could come back to haunt us. The government would have been well-advised to find some other way of closing the deal.